Historically, a discretionary order referred to a large order given to a market maker by an institutional customer to “work” over time at his discretion, which gave the market maker the right to determine when, and at what prices, to execute the trades. On the current options marketplace, users are generally not able to submit electronic orders that include superior, nondisplayed prices for automatic matching in the order books.
Discretionary orders have been in use on electronic equities marketplaces for years, i.e. in marketplaces that apply price/time priority rules. They have not been in use, however, in marketplaces that provide guaranteed entitlements to specified market participants, such as a lead market maker in an options series.
Accordingly, there is a need for a discretionary order that simultaneously respects both traditional specialist/market maker guaranteed entitlements, when they are applicable, and price/time priority matching principles. To encourage market makers to quote at their best prices to participate with an incoming discretionary order, there is a need for a market maker guaranteed entitlement model that requires the market makers to be quoting at the national best bid and offer (“NBBO”) at the time the incoming discretionary order is received. To encourage customers who post discretionary orders to display prices at the NBBO to the marketplace, there is a need for a market maker guaranteed entitlement model that only gives preference to the displayed price of a posted discretionary order, and executes the superior, nondisplayed discretionary price according to price/time priority matching principles.